Navigating Bumpy Terrain

Navigating Bumpy Terrain

Talk about foresight. In 2005, Pete Linneman launched American Land Fund, a Philadelphia-based private real estate equity firm poised to take advantage of the downturn he believed was ahead in the housing market by purchasing raw, undeveloped, unentitled land in the path of development. The fund’s profits would come from buying raw land and working with homegrown partners to convince local officials to grant the properties development rights, transforming them from unentitled to entitled land with permits to build thousands of homes. The value of land rises and falls based on entitlements because builders most often buy lots rather than raw land. A lot approved for a 10-story condominium or office building is much more valuable than the same property zoned for farm or even a few single-family homes.

ALF’s portfolio now spans 9,500 acres and 17,400 residential lots across seven states. “We are still, on a very selective basis, looking for additional properties. But since we have a couple hundred million dollars’ worth of land, we don’t feel the need to keep doing it,” Linneman says.

Linneman, a longtime University of Pennsylvania real estate professor, is circumspect about the significance of his real estate predictions a decade ago. “We were too early in the execution of at least a third of it,” he says. Linneman discusses the uneven terrain beneath land sales.

How is the model for bulk land sales changing as markets stabilize?

Homebuilders are being very cautious. This downturn has lasted so much longer than expected and [still] has everybody’s attention. They’re very sensitive about small things—a data release that people read way too much into.

How does that play out in the new home sales market?

In the past, the norm was not only that builders would have model homes, they’d have a number of homes in various states of completion, speculatively. When you went to see the models on a Saturday, the builder would say: “We can build you this one and have it done in eight months or show you one that’ll be done in a month.” Now, they’re not willing to carry any speculative [homes] beyond models. That means the velocity is much slower for land takedowns.

Where is the value of land headed in 2015?

I’m a big believer that home values are going to go up faster than inflation and land values will go up faster than home values because they’re the residual [the value of land after a builder subtracts costs from revenue]. We’re still underproducing homes.

Is financing loosening up at all?

It’s slowly loosening up, but in the near term, the real key is homebuilders and how aggressive they decide to be. They have strong balance sheets, so the state of the credit markets is not a near-term constraint.